Cyber-security turns into new battleground as US-China tension grows

As the countries trade blows amid claims of online spying, some see it as a
final effort by Washington to retain its economic superiority
.

The Obama administration has not held back on hyperbol and says cyber attacks, pose a greater risk to the US than traditional forms of terrorism, and rank as the most dangerous and immediate threat facing the nation.Photo: Alamy

In the late 1700s, a budding engineer called Samuel Slater took an apprenticeship in a Derbyshire textile mill. He learnt more than the job, however. Slater memorised the blueprint for the mill itself, bought a ticket to New York and sold the information to the Americans.

At a stroke, Britain’s competitive advantage in textiles was gone and the US flooded the market with cheap cloth, ushering in an era of price wars.

Techniques have moved on a good deal since Slater. Washington officials and cyber-security experts claim that a sophisticated group of hackers working for the Chinese government has been attacking corporate America, going via the digital back door to steal technology blueprints, pricing documents and even maps of the nation’s power supply.

They did not name names, but the hackers, a shady Shanghai group known as Unit 61398, are known to have targeted Coca-Cola in the past, at a time when it threatened to take over China’s Huiyuan Juice Group, and Telvent, a power company which has blueprints for more than half of the oil and gas pipelines in America.

The Obama administration has not held back on hyperbole. The cyber attacks, it said, pose a greater risk to the US than traditional forms of terrorism, and rank as the most dangerous and immediate threat facing the nation.

It was not the first time America has made such accusations. Washington’s relationship with Beijing has been growing increasingly tense over the past few years, as US Senators have sought to block Chinese companies from expanding in the US on the grounds that they pose a security risk.

In 2007, Huawei, a Chinese technology company which specialises in mobile phone masts, was forced to drop a joint $2.2bn (£1.45bn) bid for Silicon Valley firm 3Com after a campaign by law makers. Last October, the House of Representatives intelligence committee went even further, and urged US companies to avoid doing business with Huawei and ZTE, another telecoms firm, in case the Chinese government used their equipment for spying.

It did not have firm evidence that this was the case, but the committee’s 52-page report cited “dozens and dozens” of calls about Chinese equipment behaving suspiciously. Its anxieties were fuelled further by the fact that Huawei’s founder, Zhengfei Ren, is a member of the Communist party and used to be a senior engineer in the People’s Liberation Army.

Both Huawei and ZTE “provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems. China may seek co-operation [but] even if the company’s leadership refused such a request, Chinese intelligence services need only recruit working-level technicians or managers in these companies.”

The Shenzhen-based businesses say there is little they can do to prove their innocence. They have invited customers to come and inspect their factories, but a black mark hangs over them.

Huawei’s chairman, Sun Yafang, claims the company is caught in the middle of a political war between America and China – a view which chimes with Beijing’s own arguments that Washington is making accusations purely to fuel its own economic interests.

It is a view shared by Prof Ann Lee, author of What the US Can Learn From China, who holds positions at both New York University and the University of Peking. Whether it takes five years or 50 years, China is on the brink of eclipsing America as the largest economy in the world and, as far as she is concerned, Washington is playing dirty as a measure of last resort.

“It is using these spying allegations to justify why people should not buy Chinese goods. America used to argue that it was the home of innovation, and that Chinese goods were poor quality, but it can’t do that anymore,” she says.

The Chinese technology market might be flooded with fake iPhones and unashamed imitations, but Chinese companies are giving US rivals a serious run for their money.

In Beijing, Lenovo has usurped America’s Hewlett-Packard as the biggest PC manufacturer in the world, and has now set its sights on doing the same in the smartphone market. Meanwhile Huawei has toppled Ericsson as the largest telecoms equipment maker, even without access to the US market, and is battling to do the same in the lucrative cloud computer networking market, posing a serious threat to the likes of Cisco.

With the US recovery still fragile, any delay to China’s seemingly inevitable rise is a help. The country has already taken a major bite out of America’s production industry. According to a study by Prof Robert Scott, the growing US trade deficit with China cost the US more than 2.7m jobs between 2001 and 2011 – more than half of all American manufacturing jobs lost during that period.

However, Prof Lee says that will only take American companies so far. If Chinese products are as good as America’s, or even better, and come at a cheaper price, there will come a point when a straightforward economic argument will overshadow patriotism.

Privately, Huawei executives also admit they are banking on price to triumph over jingoism. Publicly, the company has said it is exiting the US market, but senior sources at the company say that it is really just waiting it out.

But Washington is sticking to its line that America is under siege from Chinese spies. Peter King, a member of America’s house committee on homeland security and chairman of the sub-committee of cyber-security, said: “What China is saying is just nonsense. These are very real allegations and very serious allegations. I’ve been in enough classified security briefings to say that with certainty.

“There is a very real economic concern, [but only] in terms of China getting access to trade secrets and technology.”

Barry Bosworth, a former presidential adviser and fellow of the respected Brookings Institute, agrees there is little question that China is spying. However, he adds that America is undoubtedly doing the same.

“Industrial espionage is nothing new. It had been happening for decades, long before China was a threat,” he says. “The accusations are an irritant to China, but that’s all. They see America as gathering a big ball of lint, claiming intellectual property all over the world.”

However well-founded Washington’s claims are, it is foolish for America to make the argument. “You could just as easily say the same thing about American technology,” he says. “If the Chinese government is to hire technicians to conceal surveillance technology in goods shipped to the West, what is to stop the US government from hiring its own team of technicians at Microsoft or Cisco?”

But Washington’s decision to blacklist certain Chinese-made goods gives America a bit more leverage in its battle to persuade China to open up for trade.

US officials want to do away with the rules which ban certain types of company, such as car manufacturers or publishers, from launching in China without a local partner. They also want to scrap the laws which put heavy demands on foreign financial services companies, tilting the playing field heavily in the Chinese players’ favour.

America, as with the rest of the world, is acutely aware of China’s rapidly growing middle-class population, and the potential spending power to be unlocked if only they could operate freely.

Starbucks, the coffee shop chain, already expects China to be its largest market outside America next year, while Apple expects China to become its biggest market anywhere in the world. But America wants to sell lucrative services to the Chinese market, as well as manufactured goods.

“There is ample opportunity to allow greater foreign participation and thereby have a more dynamic financial services sector by lifting equity caps and lifting investment restrictions,” Lael Brainard, the US Treasury’s most senior international official, said this month.

As things stand, however, the bias towards China’s state-backed corporations “chokes off more innovative, more competitive private enterprises”, she said.

America is also eager for China to lift the restrictions on its yuan currency, allowing it to trade more freely, rather than restricting its movement within a narrow band.

Not all the pressure is coming from the US government. Many Western companies still have deeply-rooted misgivings about the Chinese system. Just last week, Carson Block, the founder of Muddy Waters research and a long-term Sinophile, told this newspaper that China’s banks hold more toxic assets than their Western peers did ahead of the 2008 financial crash.

“The domestic Chinese banking system is a mess, with an enormous amount of bad loans, or loans waiting to go bad,” he said. “China is a massive asset bubble.”

If Mr Block is wrong, China represents a fertile market that America wants to tap. But if he is right, the US has all the more reason to want to tighten its grip, and try to prevent an economic collapse in China that would stand to drag America down with it.

Next month, talks between the two superpowers will intensify as President Obama meets China’s new president, Xi Jinping, at the luxury Rancho Mirage resort in California.

The two men are due to discuss the thorny questions of China’s difficult trading relations, alongside the alleged cyber-attacks and the two countries’ growing tensions over China’s maritime boundaries.

However, for many in Beijing, these are all part and parcel of the same issue: the Obama administration’s “pivot to Asia” and the recent flurry of cyber-crime allegations are simply a transparent attempt to contain China’s rise.